Avoid putting too much company stock in 401(k)

If you like the company you work for, show your loyalty by doing the best job you can and by taking part in work-related volunteer activities. However, when it comes to meeting your retirement goals, you'll want to invest with your head, not your heart - so think long and hard about funding your 401(k) with your company stock.

Why? Because company stock, like all stocks, will rise and fall in value. So, if you've jammed your 401(k) full of company stock, you could be taking on a level of risk with which you are not comfortable.

And in the past few years, we have seen some high-profile "401(k) meltdowns" which, in an astonishingly short period of time, dissolved a great deal of wealth belonging to employees who put their faith in company stock. For example, about 58 percent of employees' 401(k) assets were invested in Enron stock when it lost almost all its value during 2001.

Unfortunately, many 401(k) participants still believe that "it can't happen to me." Some 17 percent of all 401(k) participants have 50 percent or more of their account in company stock — pretty much the same figure as in the pre-Enron days, according to the Profit Sharing/401(k) Council. And about 16 percent of all 401(k) plan assets were held in company stock at the end of 2003, according to the Investment Company Institute.

How much is "too much"?Many financial experts recommend investing no more than 10 percent of 401(k) plan assets into company stock - but this figure is just a guideline. When considering how much company stock to put in your 401(k), look at two key factors:

• Size, strength, history of company — If you work for a big, established company, with a long track record of profitability, you might feel justified in adding a higher percentage of company stock into your plan than you would if you worked for a small, start-up firm.

• Stage of your career — When you're just starting out in your career, you've got many years to overcome the "down" periods of some of the more volatile investments in your 401(k) - such as your company stock. But when you're nearing retirement, you may want to try to protect any gains you've achieved — and cut back on your risk level — so you can potentially increase the money available to you when you begin taking withdrawals. Consequently, in your final years of contributing to your 401(k), you might consider lowering the percentage of company stock in your plan.

The "match" gameYour employer may offer shares of company stock as a 401(k) matching contribution. If so, consider putting in as much as necessary to earn the match. But, once you've received it, see if it's possible to "trade in" the company shares for other investments within your 401(k). An increasingly large number of companies now allow this type of exchange.

Diversify, diversify, diversifyUltimately, you'll want to build a diversified 401(k) portfolio. Choose the mix of stocks, bonds, government securities and other vehicles that fits your risk tolerance, time horizon and long-term goals. To get the appropriate asset allocation, you may want to consult with a financial professional.Take action soon. Your 401(k) can be a great way to save for retirement — if you use it wisely.